Article

Fed holds rates: How long must we wait?

IoD asks when the era of ultra-low interest rates will come to an end

Commenting on the US Federal Reserve’s decision to hold interest rates at their near-zero record low, James Sproule, Chief Economist at the Institute of Directors said:

“The Federal Reserve’s decision to hold interest rates is disappointing. It lacks the bold and necessary steps which must be taken to normalise monetary policy. A small increase would have set us on a path to normalising monetary policy and sent a clear message that the US economy can handle – and in fact, needs – higher interest rates.

“The big question now is how the Bank of England responds. The IoD continues to believe that this prolonged period of ultra-loose monetary policy should be called to an end sooner rather than later. The Bank of England appears reluctant to act before the Federal Reserve. Therefore today’s decision has implications far beyond the United States.

“It is always tempting to put off a difficult decision. But this should not be a difficult decision for rate-setters in the UK. Britain’s labour market is strong. Unemployment is low, vacancies are high, and wages are growing at a decent rate. Growth has returned, businesses are confident and productivity increases are starting to come through. This far in to the business cycle, rate-setters need to wake up to the fact that there are few reasons interest rates should be this low.

“If the Monetary Policy Committee does not begin the gradual and incremental process of normalising rates there is a growing danger that they are simply storing up, if not creating, more difficulties for later on. Rate rises can take a year or more to filter through to the real economy, a rise now would bring some welcome circumspection to investment decisions and asset purchases. Interest rates must go up on this side of the Atlantic at some point. The time is nigh, Mr Carney.”